Sun, 29 Feb 2004

"The making of the New York canals did not really cost the people of
the state the value of one cent, except so far as foreign
materials may have been employed in the construction of them, or for
that small portion of the profits on labor which the artists and
laborers may have carried out of the state. On the contrary,
they gave a large and wholesome circulation to money, and enriched
many individuals; and the increased value of property, and of profit,
resulting from them, must be supposed by counting up hundreds of
millions of dollars, if, indeed the benefits of them be within
supposition at all!

Niles was probably not the first person to express that economic
fallacy, nor has he been the last. Keynes said we owe it to
ourselves," by way of excusing public debt. Yes, you can be
pedantic and say that yes, literally, had the canal been paid for with
dollars that had "New York" written on them, only a few of them would
have been initially spent or taken out of state. But that's not
really Niles' point. His point is that it literally didn't cost
anything, just like Keynes' point is that public debt doesn't cost
anything because we're just paying the interest to ourselves.

This all is yet another flavor of Bastiat's
broken window fallacy. In this fallacy, a vandal breaks a window,
and creates employment for the glazier. And yet that doesn't make
sense, because the world isn't made better, and more people aren't
employed by destroying things. The key is what is
seen and what is not seen. What is not seen -- and it's hard to
see because it ends up not existing -- and not seeing is not believing
-- is whatever the homeowner would have done with the money
besides repairing windows.

Similarly, what Keynes and Niles miss is what would have been done
with the money had it not been spent on a canal, or borrowed and spent
by the government. Don't be fooled by "We owe it to ourselves."

Wed, 25 Feb 2004

I've been having a discussion with someone about the value of
recycling. I said: William, the resource stream from a physical point
of view is obviously not endless. From an economic point of view, the
economic value of the resource stream *is* endless. Since you have to
use economics to weigh recycled versus virgin materials, you can't
rely on a physical analysis to come to an economic conclusion. It
would be like trying to use algebra to solve a problem that needed
calculus.

William responded:

You're still thinking inside the box. Step outside and take a look around.

The problem with the assumption of infinite resource value is that it does
not match the real world. Economic theory based on such an assumption may
be very beautiful and very coherent, but it has no practical value
whatsoever. Just as I have problems with environmentalists refusing to
recognize the implications of sound economic theory, I have problems with
economists refusing to recognize the implications of sound ecology. The
real world is NOT infinite. Therefore, any theory that assumes that
resources have infinite value cannot be trusted to guide practical actions
in the real world. That is a good, old-fashioned QED.

William is confused, so I must be writing badly. I'll try
responding at length.

Economic Subjectivism

Over a century ago, economists generally agreed that something was
worth what it took to make it. That is, something had an intrinsic
value. We now know that's not true. It completely fails to explain
trade in a free market.

If you had intrinsic value in a free market, nobody would bother to
trade anything. Whenever anybody traded two things, they would be
just as likely to trade them back, because they're of equal value. In
a market is free of coercion, nobody would bother to trade one thing
for another unless it was of equal intrinsic value. The only way out
of this failure is to claim that free markets don't exist, and that
all trades occur because the traders have unequal power.

If you can coerce people by applying power to the trade, then you
will have trade. The more powerful party will force the less powerful
party to hand over something of greater intrinsic value. Clearly,
there is trade, so if you assume intrinsic value, then you must deny
the existance of free markets.

Remember, Marx devised his theories in the face of intrinsic value
theory.

What economists know, and what many people seem not to know, is
that value is not intrinsic to the item, but is instead an attribute
that each person applies to the item. This insight, although
seemingly simple and perhaps even obvious, explains many things
previously thought paradoxical.

Everyone has likely had the experience of going grocery shopping
before dinner. Everything on the shelves looks so good.
Doing the same shopping after dinner will produce different results,
and yet the groceries haven't changed. You have, so you place
different values on the foods. If food had an intrinsic value, you
would purchase the same food before or after dinner.

Free markets are easily explained by the fact that parties trade
for things that they value more. If I'm buying milk at the store, the
store values my money more than their milk, and I value their milk
more than my money. That's why they bothered to keep their store open
and pay cashiers, and that's why I bothered to drive to the store.
Sometimes I've traded a dollar for a dollar, because I had a bill and
wanted four quarters. I valued the one form of a dollar higher than
the other form, and the other party was indifferent to the form but
desires the intrinsic pleasure of being helpful.

Infinite Value

Infinite value is the proposition that a finite amount of
something can have an infinite amount of value. People who are not
economists, and are stuck in the 1870's objective value see this as
being obviously false. How could a finite amount of something be
valued infinitely high? The idea is, as William said in the opener,
false, QED.
Unfortunately for him, he hasn't proved anything, but is simply
assuming his result.

Infinite value is an inevitable result of relative value. Let's
say that you were using natural resources at a certain rate, and you
were increasing the relative value of these resources faster than you
used them. Specifically, let's say that you produced a certain amount
of value out of consuming the first half of a resource. You were able
to double the value of a specific unit of the resource, so that you
could consume half of the remaining resource and produce the same
value. Like Zeno's paradox, the resource continues to produce value
forever.

In the real world, you reach the atomic level sooner or later, and
effectively run out of the resource. Does this invalidate the idea of
infinite value? No, because in time, the substitutes for a resource
become cheaper than the resource, and people will switch to those
substitutes. What this means, though, is that people can consume
resources based on the price, rather than having to worry about running
out. You can act as if resources were infinite even though they're
physically finite. That's a surprising result, but if a science
doesn't surprise you from time to time, why bother studying it?

Recycling

What lesson does this have for recycling? Simply put, it means
that you don't have to worry about running out of resources. Recycle
when it makes sense for you. If it's cheaper to recycle something,
then recycle it. If it's not cheaper for you, don't recycle it.

Thu, 05 Feb 2004

The debate about who should pay for higher education is so squalid.
Everybody benefits, not just the graduate. It is proper that the whole
of society should pay for training and education (vocational as well as
academic)so that the massive burdens of expense and debt do not
discourage and deter candidates from poor backgrounds.

This is an anti-economic idea. First of all, there are no subjects
of study which are "squalid". To say that is to expose ignorance of
what economists actually do. Economists study spontaneous order. To
suggest that we shouldn't study something is to suggest that economics
should not exist, as a profession, as a science, as a way of
thinking.

Second of all, the mere existance of external benefits is not, a
priori (and since K J rejects the idea of studying the issue because
doing so is "squalid", they don't want there even to BE an postori)
reason to spend coerced money on the source of the positive
exernalities.

At a minimum you should ask the question "Will the recipient of the
benefit pay for it anyway?" before deciding whether taxation is
necessary. If they will, then there is absolutely no need to
take money from other people and spend it against their wishes. For
taxation by definition is spending money against people's wishes. If
they wished to spend the money, they would do so with no need to
threaten to hurt them if they don't.

Taxation is violent. You would be surprised how many leftists
oppose war in the name of justice but promote violence in the name of
justice. Poor justice, to be used and abused so!

Tue, 03 Feb 2004

The following reprint from the Federal Reserve Bank of Dallas
explains why job destruction is an essential part of job creation.
Yes, it's a PDF, but download it and read it anyway. It's good, like
everything I've seen come out of the Fed of Dallas. Good people
there.

Economists, questioning why America's job creation in the recovery of
the early 1990s fell short of expected levels, have reconsidered the
ideas of Joseph Schumpeter, who offered the first scholarly
explanation of the churn in the 1930s. Schumpeter advanced the paradox
that economic progress destabilizes the world. Progress and job
destruction go hand in hand in a dynamic process he called creative
destruction. Today, as in the 1930s, Schumpeter's insights help
explain how jobs emerge and disappear through the innovation and
entrepreneurship of free enterprise.